Banks begin lowering both deposit, lending rates

A downturn in gains from investment in government securities prompts banks to begin lowering deposit and lending rates both with their attention now switched to private-sector lending, sources say.

According to bankers and money-market analysts, initially, the commercial lenders are cutting down rates on deposit and advances for corporate entities and planned to do the same for the commoners from April next under the gradually-changing scenario in interest regime.

Amid the persisting economic sluggishness because of the business uncertainties after the recent mass uprising, they said, the banks have been using the high-yield investment window of treasury bills and bonds to make some sort of profits even in the existing low-lending regime.

But since early December last, the cut-off yield gains from treasury bills (T-bills) and bonds (T-bonds) continue falling, which, in fact, forces the bankers to go for a revision of the interest arithmetic despite the tight monetary-policy stance of the Bangladesh Bank (BB), the country's central bank, to squeeze money supply in a prolonged inflation combat.

According to the data with BB, the cutoff yield, generally known as interest rate, on the 91-Day, 182-Day and 364-Day T-bills had reached record highs of 11.80 per cent, 11.90 per cent and 11.99 per cent respectively.

But since early December last year, the downward trend in the yield of the T-bills continues plummeting to reach 10.35 per cent, 10.25 per cent and 10.35 per cent respectively in accordance with the auctions held on Sunday, the data showed.

Not only the T-bills, the yield on all T-bond segments (2-year, 5-year, 10-year, 15-year and 20-year ones) came down significantly, giving an indication over the downward revision in both deposit and lending rates in the banking sector.

Bangladesh Bank executive director (monetary policy unit) Dr Ezazul Islam says they have been observing a downtrend in the long-term yield curve in recent times, which gives an indication that the interest rate in the banking system will not take an upturn.

As the yield on government securities (G-Sec) keeps being dragged down by higher demand, he says, the banks will have to give more concentration on private-sector-credit growth through cutting down interest rates.

On a note of optimism, Mr. Islam, having 33 years of central-banking experience to his credit, says the inflation rate is expected to come down further in the coming months, which gives a positive outlook.

"If the downward trend in inflation continues as per our expectation, the central bank will adjust the policy rate in line with inflation trend in the near future," he told the FE.

Seeking anonymity, the managing director of a private commercial bank says they have already cut 50 basis points from both deposit and lending rates for corporate entities as an initial response to the gradual fall in yields on the G-sec market.

They plan to do the same for all other depositors and borrowers next month that will be effective from April.

Asked why the bank takes time in cutting deposit and lending rates for common people, he said, "It is taking time because of weak monetary- transmission mechanism."

Managing director and chief executive officer of Pubali Bank Mohammad Ali says the bank, like other banks under the current changing interest-rate regime, has taken a plan to give more attention on private-sector credit in the days ahead.

"As part of the planning," he says, "our bank is set to make a downward revision regarding deposit and lending rates in latter part of this month."

Managing director and chief executive officer of Mutual Trust Bank Syed Mahbubur Rahman says they have closely been observing the falling trend in yield on the G-sec market.

"If the trend continues further in the coming few weeks, we'll go for revision of deposit and lending rates," the experienced banker told the FE.

Managing director of Dhaka Bank Sheikh Mohammad Maroof notes that the investment opportunities keep shrinking in recent months. So, banks having excess liquidity in a competition are thronging the G-sec windows by offering lower yield to get their bids accepted under the lower-lending regime.

"As a matter of fact, the yield on G-sec market continues falling in recent weeks riding on higher demands. If things continue in coming days, that will definitely prompt the banks to reduce deposit and lending rates," says Mr Maroof.

According to the BB data, the government borrowed Tk 75 billion on the day through issuing three types of T-bills in the day's auction. Banks submitted bids worth nearly Tk 190 billion against the pre-auction target of Tk 75 billion for the T-bills.

Similarly, banks submitted bids worth Tk 220 billion against the pre-auction target of Tk 40 billion on Tuesday last for Five-Year Bangladesh Government Treasury Bonds (BGTBs).

These submissions on the bids indicate higher demand for the G-Sec in recent months because of lower demand for credit particularly from the private sector.

The growth in credits to the private sector came down to 7.28 per cent in December 2024 on a year-on-year basis from 7.66 per cent a month ago.

It was 2.52-percentage-point lower than the central bank target of 9.80 per cent for the first half (H1) of current fiscal year (FY) 2024-25.

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